The S&P said that more subdued external demand, weak political leadership, increasing cost of funding and new budget austerity measures are all likely to dampen growth going forward. Slower growth could in turn cause Italy to miss its fiscal targets set for next year as it generates a revenue shortfall.
The downgrade could increase Italy's borrowing costs just as the country embarks on large refinancing program that entails nearly 30 Billion euros of gross issuance in October and November. These upcoming bond auctions could become the true test of country's credit strength and if investors balk at rolling over its debt the downward pressure on the euro could quickly accelerate.
The euro fell nearly 100 points in early Asian trade in reaction to the news. but has since stabilized at the 1.3600 level as currency trader await the open of the European equity markets. The economic calendar is relatively quiet but traders may focus on the latest ZEW survey expected to print somewhat lower at than the month prior. Consensus views are for a print of -44.3 versus -37.6 but given the recent turmoil in the financial markets chances are good that the reading may miss expectations. If ZEW misses its mark dragging equities lower the EUR/USD could probe the 1.3500 figure as the day proceeds.